Telecom M&A: New rules make circle mergers easier

However, with the riders on valuation of a firm with spectrum, viability concerns remain

Wednesday’s new merger and acqusition (M&A) rules for the telecom sector will allow the two top companies in terms of market share in 15 of the country’s 22 circles to merge.

The Telecom Commission has permitted  a combined entity to have a market share of up to 50 per cent in terms of subscribers. Earlier, a combined entity could not have a  share of more than 35 per cent, almost ruling out any scope for a merger between the top two telcos in any circle.

The circles in which such a merger would now be possible include Andhra Pradesh, Delhi, Mumbai, Gujarat, Haryana, Kolkata, Maharashtra, Punjab, Karnataka and Tamil Nadu.  In four of the remaining seven circles, the combined market share is marginally above 50 per cent. The government says it will now permit mergers even if the market share is higher,  if the combined entity reduces this in a year to comply with the rules (THE NETWORK THEY COMMAND).

The top two telcos in the other 15 circles have a market share from a low of around 40 per cent in Kolkata to touching 50 per cent in Rajasthan and Tamil Nadu. In Mumbai, the top two have 43 per cent; in Delhi, 45 per cent.

In striking contrast, the lowest two telcos in terms of market share range from one per cent in Uttar Pradesh (West) to a high of around 20 per cent in Assam. In  Delhi, the smallest two have far less than 10 per cent; in Mumbai, 15 per cent. Currently, the number of companies in each circle is around six to eight, offering scope for consolidation.

Airtel, for instance, could hypothetically merge with Vodafone in all circles, with the notable exception of West Bengal, and follow the market share limit. Airtel could also merge with Idea Cellular in all the 22. It could merge with Aircel in all save three — Assam, northeast and Jammu & Kashmir. It could scrape through a merger of Tamil Nadu, where Aircel is  very strong.

Similarly, Vodafone and Idea could merge in all circles and just scrape through in Gujarat, where both are big. Even Vodafone and Aircel could merge in all circles. Idea and Aircel could in all, too, and as a combined entity take on Airtel for the number one position, each with a 22 per cent pan-India market share Of course, M&A’s would also depend on many other factors. The government’s decision that an acquirer has to pay the market price for buying into an incumbent compnay which has got spectrum bundled with the licence at an adminstered price is a clear dampener.

Telcos say two other factors will keep away consolidation. By acquiring a compnay which has spectrum bundled with it, the acquirer now has to pay spectrum usage charge (SUC), which will go up from three per cent to eight per cent. “That will be a killer which no one would want. Until SUC is reduced to a uniform level, consodlidation looks unlikely,” said an official.